Prices recover and close higher despite some unfriendly data.

The Treasury market got an array of unfriendly economic news yesterday morning, but after an initial self-off, prices managed to recover and ended th day with small gains.

Late in the afternoon, the 30-year bond was up 1/4 point to yield 8.51%; immediately after the numbers, the long bond was 3/4 point lower on the day.

The numbers that sparked the morning losses included bugger-than-expected increases in May producer prices and retail sales and a drop in weekly jobless claims.

Traders said some of the unfavorable news had already been accounted for as prices moved lower earlier this week.

"You've reached levels that are just too ridiculously cheap," said Henry Copeland, a Treasury trader at Bank Julius Baer. "The front end has certainly discounted one Fed tightening.

In fact, Mr. Copeland said, interest rates are reaching levels that could impede the fledgling economic recovery. "With bond yields where they are. mortgage rates are going to be poking their heads through 10%."

When the Treasury market reached its lows after the numbers, a small amount of retail buying pushed prices higher, and that set off a round of dealer short covering, traders said.

Kevin Logan, chief economist at Swiss Bank Corp., said there were probably already a lot of short positions established going into the numbers.

"The market went down right away, but all the guys already short said, 'Great, I'll buy them back,'" Mr. Logan said. Meanwhile, "people who got short at the lows got caught, and they probably had to cover."

Analysts said the sum of the morning's news was unfavorable for the bond market, since the indicators confirmed that the economy is beginning to recover while the hoped-for improvement in inflation rates has yet to materialize.

Mr. Logan argued that the initial claims figure was the most important of the day's indicators.

New claims for unemployment insurance fell 38,000, to 401,000 in the week ended June 1. Claims have fallen six out of the last seven weeks and are far below the peak of 543,000 reached in mid-March.

Although some of the decline in claims may be due to the Memorial Day holiday, the report suggests that "labor market conditions continue to improve," Mr. Logan said.

Treasury Market Yields

Prev. Prev.

Thursday Week Month

3-Month Bill 5.74 5.71 5.53

6-Month Bill 6.06 5.95 5.80

1-Year Bill 6.37 6.27 6.10

2-Year Note 7.02 6.85 6.82

3-Year Note 7.42 7.28 7.11

4-Year Note 7.61 7.47 7.34

5-Year Note 7.97 7.87 7.75

7-Year Note 8.19 8.08 7.97

10-Year Note 8.31 8.21 8.11

20-Year Bond 8.50 8.42 8.34

30-Year Bond 8.50 8.42 8.32

Source: Cantor, Fitzgerald/Telerate

The 13,000 drop in the number of people receiving state unemployment benefits, to 3,488 million in the week ended May 25, was another positive sign since it suggests more unemployed workers are finding jobs, he said.

While some people were returning to work, others were spending their wages. Retail sales rose 1% in May, when the market had expected only a 0.6% gain.

And while economists expected the jump in car sales late last month to play a big role in the report, May sales, excluding autos, were almost equally strong, rising 0.9%, with increases occurring in most categories.

"The thing that's impressive is that the increases are pretty well across the board," said Brian Fabri, chief economist at Midland Montagu.

Cynthia Latta, a financial economist at DRI/McGraw Hill Inc., said the retail sales report was consistent with other statistics indicating the economy has turned around.

Some traders blamed the higher sales on last month's good weather. Ms. Latta said that probably helped, "but if consumers were feeling extremely pessimistics, even warm weather wouldn't make them go out and spend."

On the inflation front, May producer prices rose 0.6%, and the core rate, excluding food nd energy prices, was up 0.4%. Those gains were above the consensus forecast, which called for a 0.3% increase in both numbers, but there had been a lot of talk in the market of a 0.4% rise in the core rate.

Ms. Latta said the increase in producer prices was not alarming, since the numbers do fluctuate from month to month, but it probably was disappointing to the bond market, which hoped to see signs that inflation was decelerating.

Other analysts said the big gains in tobacco and aircraft prices, which fueled the big jump in producer prices, were not likely to be repeated.

Mr. Fabbri dismissed the price report as a "one-time problem."

The September bond future contract closed 7/32 higher, at 92 16/32.

In the case market, the 30-year 8 1/8% bond was 13/32 higher, at 95 24/32-95 28/32, to yield 8.50%.

The 8% 10-year note rose 1/4, to 97 24/32-97 28/32, to yield 8.31%.

The three-year 7% note was up 1/32, at 98 27/32-98 29/32, to yield 7.42 %.

Rates on Treasury bills were mixed, with the three-month bill up three basis points at 5.59%, the six-month bill up one basis point at 5.81%, and the year bill four basis points lower, at 6%.

In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply fell $1.3 billion to $850.6 billion in the week ended June 10; the broader M2 aggregate dropped $9.7 billion, to $3.4 trillion; and M3 declined $14.5 billion, to $4.2 trillion, in the same period.

Also, for the week ending Wednesday, the federal funds rate averaged 5.75%, down from 5.91% the previous week, according to the New York Fed.

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